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Major oilsands development reaches $2 billion over budget

The construction cost for the completion of the initial phase of the Kearl oilsands project in northern Alberta is $2 billion over budget, due to problems with the transportation of Korean built modules and poor weather.

“Despite U.S. permitting and regulatory issues that continued for almost two years involving transportation of facility modules, our project team achieved industry-leading safety performance, and mitigated significant challenges, including an early onset of winter and exceptionally harsh weather during current start-up operations,” said Imperial Oil in a fourth-quarter financial report.

“We continue to focus on completing start-up safely, and expect production of mined diluted bitumen from the first froth treatment train in this quarter.”

At the end of 2012, construction of the Kearl initial development was complete.

Phased start-up activities are underway. Currently, Imperial’s first priority is completing start-up activities safely, which includes mitigating the impacts of abnormally cold weather on both workers and equipment.

The first phase of the $8 billion Kearl oilsands project was approved by the board in May 2009.

But, Imperial changed its development plan from three phases to two in May 2011, which will increase capacity to 145,000 barrels per day from the initial estimate of 110,000.

At this time, the new cost of construction for the initial phase was estimated to be $10.9 billion. Imperial announced that the final cost for the Kearl initial development is expected to be $12.9 billion.

Imperial Oil, which is a subsidiary of Exxon Mobil Corp., awarded a US$250 million contract to a South Korean manufacturer Sungjin Geotec Co to supply 207 giant pre-assembled modules to the Kearl oilsands project.

Imperial arranged for the first 33 modules to arrive in the Port of Vancouver, Washington in late 2010, as part of the first phase of construction. These modules were transported by barge on the Columbia and Snake Rivers to Lewiston, Idaho and were supposed to move along U.S. Highway 12 to Montana.

However, delays in the permitting process from legal challenges in Idaho and Montana forced Imperial Oil to reduce the size and weight of the shipments and obtain permits for a new route.

Imperial employed more than 200 people to break the modules into 60 smaller shipments.

Disassembling and reassembling the modules involved 5,000 to 6,000 person-hours of work and was estimated to cost at least $500,000 each.

This new approach allowed imperial to transport the modules on US 95 in Idaho, then east along I-90 through Idaho and Montana, and north on I-15 to the Canadian border.

More importantly, Imperial shipped the remaining loads from the Port of Pasco, WA, by truck on US 395 in Washington and along I-90 through Washington, Idaho and Montana, then north on I-15 to the Canadian border.

Together, the initial development and expansion projects will develop 3.2 billion barrels at a unit development cost of about $6.80 per barrel.

This is up 10 percent from the prior estimate of $6.20 per barrel driven by the cost to re-sequence work from the module transportation issues and the early onset of winter and harsh weather during start-up. Start-up of the expansion project is planned in 2015.